Woodhouse v Francis [No 2]
[2022] WASC 318
JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA
IN CHAMBERS
CITATION: WOODHOUSE -v- FRANCIS [No 2] [2022] WASC 318
CORAM: HILL J
HEARD: 6 OCTOBER 2020
DELIVERED : 19 SEPTEMBER 2022
FILE NO/S: COR 114 of 2019
MATTER: IN THE MATTER OF GGA LIFESTYLE PTY LTD (IN LIQ) & DOUBLEUP HOLDINGS PTY LTD (IN LIQ)
BETWEEN: DANIEL HILLSTON WOODHOUSE
First Plaintiff
IAN CHARLES FRANCIS
Second Plaintiff
AND
GLEN FRANCIS
First Defendant
TIMOTHY DAY
Second Defendant
Catchwords:
Corporations law – Application by liquidators for directions under s 90-15 of the Insolvency Practice Schedule – Whether indemnity secured by equitable lien can be exercised by liquidators against partnership assets – Priority of distribution of partnership assets where both partners are companies in liquidation – Whether s 561 of the Corporations Act 2001 (Cth) applies in the winding up of the partnership – Whether priority regime prescribed by s 561 of the Corporations Act applies to the payment of debts of the partnership
Legislation:
Bankruptcy Act 1966 (Cth), s 110
Corporations Act 2001 (Cth), s 556, s 561
Insolvency Practice Schedule 2016 (Corporations) (Cth), s 90-15, s 90-20
Partnership Act 1895 (WA), s 50, s 57
Result:
Directions given
Category: A
Representation:
Counsel:
| First Plaintiff | : | C Pearce |
| Second Plaintiff | : | C Pearce |
| First Defendant | : | No appearance |
| Second Defendant | : | No appearance |
Solicitors:
| First Plaintiff | : | Blackwall Legal LLP |
| Second Plaintiff | : | Blackwall Legal LLP |
| First Defendant | : | Willliams & Hughes |
| Second Defendant | : | Williams & Hughes |
Case(s) referred to in decision(s):
Anmi Pty Ltd v Williams [1981] 2 NSWLR 138
Carter Holt Woodproducts Australia Pty Ltd v The Commonwealth [2019] HCA 20; (2019) 268 CLR 524
Commissioner of State Revenue v Rojoda Pty Ltd [2020] HCA 7; (2020) 268 CLR 281
Hendry v The Perpetual Executors and Trustees Association of Australia Ltd (1961) 106 CLR 256
HN QCV Bottle Tree Village Pty Ltd v QCV Bottle Tree Village Pty Ltd [2018] NSWSC 1807
In re Rudd & Son Ltd [1984] 1 Ch 237
Jones (Liquidator) v Matrix Partners Pty Ltd, in the matter of Killarnee Civil and Concrete Contractors Pty Ltd (in liq) [2018] FCAFC 40; (2018) 260 FCR 310
Michell, In the matter of Petromech Pty Ltd (in liq) [2021] FCA 1378
Re Amerind Pty Ltd (recs and mgrs apptd) (in liq) [2017] VSC 127
Re Ansett Australia Ltd (No 3) [2002] FCA 90; (2002) 115 FCR 409
Re Broens Pty Ltd (in liq) [2018] NSWSC 1747
Re GGA Lifestyle Pty Ltd (admins apptd); Ex parte Woodhouse [2019] WASC 167
Re Lewis (in the matter of Concrete Supply Pty Ltd) [2020] FCA 841; (2020) ACSR 459
Re O'Keeffe Heneghan Pty Ltd (in liq) [2018] NSWSC 1885
Re Universal Distributing Co Ltd (in Liq) [1933] HCA 2; (1933) 48 CLR 171
Re Victoria Station Corporations Pty Ltd (admins apptd) [2018] VSC 163; (2018) 56 VR 26
Staples v Milner as Trustee of Property of Stapes, Baker, Firth & Campbell (1998) 83 FCR 203
Woods & White v Hopkins [2016] WASC 16
HILL J:
The plaintiffs, Daniel Woodhouse and Ian Francis, are liquidators of both GGA Lifestyle Pty Ltd (Liquidator Appointed) (GGA Lifestyle) and Doubleup Holdings Pty Ltd (Liquidator Appointed) (Doubleup) (collectively Companies). The Companies are trustees of two discretionary trusts and were partners of a business which traded as 'Transit Clothing' (Partnership).
On 16 May 2019, the plaintiffs filed an originating process and sought directions of the court under s 90-15 of the Insolvency Practice Schedule 2016 (Corporations) (Cth) (Insolvency Practice Schedule) to the Corporations Act 2001 (Cth) (Act). The originating process was listed before Vaughan J on 20 May 2019 who, on the same date, delivered reasons for his decision to make orders that the plaintiffs, as voluntary administrators of the Companies, would be acting properly and would be justified in conducting the voluntary administration of the Companies on the basis that the plaintiffs were entitled to an equitable lien against the assets of the Partnership for all costs and expenses (including remuneration) in 'caring for, preserving and realising the assets of the Partnership'.[1]
[1] Re GGA Lifestyle Pty Ltd (admins apptd); Ex parte Woodhouse [2019] WASC 167.
On 14 August 2020, the plaintiffs, who by then had been appointed liquidators of the Companies, filed an interlocutory application. The application was supported by two affidavits of Mr Woodhouse filed 16 May 2019 and 14 August 2020. Prior to the hearing, the plaintiffs filed a further two affidavits, being affidavits from the plaintiffs' solicitor, Christopher Kingsley Pearce, filed 30 September 2020 and 5 October 2020, which were relied upon for the purposes of the application.
By their interlocutory application, the plaintiffs seek two orders or directions (although the second proposed order seeks alternative orders). The first concerns the entitlement of the plaintiffs as liquidators to assert an indemnity secured by equitable lien against the assets of the Partnership. The second concerns the priorities in which the proceeds of realisation of the Partnership assets should be distributed on the winding up of both the Partnership and the Companies.
For the reasons that follow, it is my view that:
(a)the plaintiffs are justified in conducting the liquidation of the Companies on the basis that they are entitled to an indemnity for all costs and expenses incurred in caring for, preserving and realising the assets of the Partnership secured by an equitable lien against the assets of the Partnership; and
(b)the Priorities Regime under the Act does not apply to the winding up of the Partnership. The proceeds of the realisation of the Partnership assets should be distributed in accordance with the terms of the Partnership Deed.
Factual background
GGA Lifestyle was incorporated on 2 May 2005 and is the trustee of a discretionary trust known as the Francis Family Trust. The first defendant is the sole director of GGA Lifestyle. Doubleup was incorporated on 2 May 2005 and is the trustee of another discretionary trust, the Day Family Trust. The second defendant is the sole director of Doubleup.
Neither GGA Lifestyle nor Doubleup traded or held any assets other than as trustee of their respective trusts. The two family trusts did not trade or hold any assets, other than their respective interests in the Partnership.
The Partnership was governed by a partnership deed dated 28 June 2005 (Deed). While the Deed included provisions for the dissolution of the Partnership, there was no automatic dissolution if administrators or liquidators were appointed to the Companies.
Clause 17 of the Deed addressed the circumstances in which a partner could be expelled from the Partnership. Relevantly, under cl 17.1(b), a Partner (a defined term in the Deed) may be expelled by another Partner if they commit an act of insolvency. Under cl 17.2, a notice of expulsion is required to be served prior to any Partner being expelled from the Partnership.
Clause 19 of the Deed sets out the provisions which govern the dissolution of the Partnership. Relevantly, cl 19.3 of the Deed provides that:
Upon the Partnership being dissolved pursuant to this clause, all Partnership Property shall be sold and the proceeds to be applied to the payment of:
(a)first the debts and liabilities of the Partnership and the expenses of and incidental to the dissolution of the Partnership;
(b)second to each Partner any unpaid profits or interest on capital which may be due to the Partner; and
(c)third the balance to the partners divided in the shares to which they are each entitled to the capital of the Partnership.
The plaintiffs were appointed as voluntary administrators of the Companies on 15 May 2019 and as liquidators of the Companies on 20 June 2019.
On 13 August 2020, Doubleup Holdings served a notice of expulsion from the Partnership on GGA Lifestyle. The notice was given under cl 17.2(a) of the Deed and relied on the act of insolvency of both of the Partners (by reason of them being in liquidation). On the same date, GGA Lifestyle gave notice that it agreed the Partnership should be dissolved and waived the notice period in cl 17.2 of the Deed. As a result, on 13 August 2020, the Partnership was dissolved.
The evidence before the court is that all assets and liabilities of each of the Companies are assets and liabilities of the Partnership.[2]
[2] Affidavit of Daniel Hillston Woodhouse filed 16 May 2019 [19].
The liquidators have prepared statements of liability to illustrate the effect of the outcome of these proceedings on various creditors. It is sufficient for the purposes of this application to observe that there is a significant deficiency of assets to liabilities and that the funds available for distribution, after payment of the plaintiffs' fees and expenses that are the subject of the orders of Vaughan J and the proposed extension of these orders, are less than $100,000.[3]
[3] Affidavit of Daniel Hillston Woodhouse filed 14 August 2020 'DHW34' - 'DHW37'.
Westpac Banking Corporation (Westpac) is a secured creditor of each Company. The evidence before the court is that each of the Companies executed fixed and floating charges in favour of Westpac.[4] Westpac asserts that it holds a first‑ranking security interest over all of the assets of the Partnership. The plaintiffs have identified two issues in respect of Westpac's claim to be a first-ranking secured creditor, namely:
(a)neither of the charges nor the memorandum of provisions expressly state that it is effective to charge property of the relevant company that is held in partnership with another;
(b)even if the assets of the Partnership or each Company's interests in them are charged, the security interests were not registered against the Partnership's ABN.
[4] Affidavit of Daniel Hillston Woodhouse filed 14 August 2020 'DHW21', 'DHW22'.
To date, these issues have not been resolved. The plaintiffs have engaged in commercial discussions with Westpac and consider there are good prospects of avoiding the necessity to commence proceedings to resolve these issues.[5]
[5] Affidavit of Daniel Hillston Woodhouse filed 14 August 2020 [21] - [23].
The plaintiffs seek clarity about the appropriate distribution of Partnership assets and the proceeds of the realisation of these assets, particularly in relation to the interplay between the Partnership Act 1895 (WA) (Partnership Act) and the Deed, with the operation of s 556 and other provisions of the Act.[6]
[6] Affidavit of Daniel Hillston Woodhouse filed 14 August 2020 [30] - [31].
Orders sought by the plaintiffs
The plaintiffs seek the following directions:
1.The Plaintiffs, as liquidators of the Companies, will be acting properly and are justified in proceeding to conduct the winding up of the Companies on the basis that:
(a)the plaintiffs are entitled to an indemnity secured by an equitable lien against the assets of the Partnership (including the proceeds and ongoing proceeds of realisation of those assets) for all costs and expenses, including remuneration, reasonably incurred in caring for, preserving and realising the assets of the Partnership;
(b)the plaintiffs' entitlement to such an indemnity secured by an equitable lien against the assets of the Partnership has priority over any claims for payment in respect of the unsecured debts of the Partnership.
THEN EITHER, if the Priorities Regime is found to apply:
2.The Plaintiffs, as liquidators of the Companies, will be acting properly and are justified in proceeding to conduct the winding up of the Companies and the Partnership on the basis that, to the extent the same permits and subject to the plaintiffs' entitlement to an indemnity secured by an equitable lien as specified in order 1, the plaintiffs should distribute the proceeds of realisation of the assets of the Partnership in the manner following:
(a)First: in satisfaction of the direction in order 1.
(b)Second: to the extent only that such assets of the Partnership are the subject of an established "security interest" which is not a "circulating security interest" within the meaning given to those terms in s. 51A of the Corporations Act 2001 (Cth), to a secured creditor over those assets in accordance with the terms of the security.
(c)Third: to the extent not already paid under paragraph (a), in satisfaction and discharge of the costs and expenses of dissolution of the Partnership and in winding up each of the Companies, such costs and expenses to include:
(i) the remuneration of the plaintiffs for acting as liquidators of the Companies; and
(ii) the costs of these proceedings,
those debts and claims to be paid in the order of priority set out in s. 556(1)(a) to (de) of the Corporations Act 2001 (Cth), read together with s. 559, as if:
(iii) the Partnership were a company which were ordered to be wound up on 15 May 2019; and
(iv) the debts or claims were incurred by the plaintiffs acting as liquidators of that company in winding up that company.
(d) Fourth: proportionately, in satisfaction and discharge of all wages, superannuation contributions or superannuation guarantee charges payable in respect of services rendered to the Partnership by employees before the commencement of the windings up of the Companies (but so that the amount payable to any "excluded employee" of one or more of the Partners as is attributable to "non-priority days" within the meaning of those terms in s. 556 of the Corporations Act 2001 (Cth) does not exceed $2000).
(e) Fifth: proportionately, in satisfaction and discharge of all amounts due on or before the commencement of the windings up of the Companies in respect of an employee of the Partnership for or in respect of leave of absence (but so that the amount payable to any "excluded employee" of one or more of the Companies as is attributable to "non-priority days" within the meaning of those terms in s. 556 of the Corporations Act 2001 (Cth) does not exceed $1500).
(f) Sixth: proportionately, in satisfaction and discharge of retrenchment payments payable to employees of the Partnership (but so that the amount payable to any "excluded employee" of one or more of the Companies does not include an amount attributable to "non-priority days" within the meaning of those terms in s. 556 of the Corporations Act 2001 (Cth)).
(g) Seventh: to the extent that such assets of the Partnership are the subject of an established "circulating security interest" within the meaning given to that terms [sic] in s. 51A of the Corporations Act 2001 (Cth), to a secured creditor over those assets in accordance with the terms of the security.
(h) Eighth: proportionately, in satisfaction and discharge of all other unsecured debts of the Partnership.
(i) Ninth: proportionately, to the extent of any surplus, as set out in clause 19.3(b) of the Partnership Deed.
(j) Tenth: proportionately, to the extent of any surplus, as set out in clause 19.3(c) of the Partnership Deed.
OR, if the Priorities Regime is found not to apply:
2. The plaintiffs, as liquidators of the Companies, will be acting properly and are justified in proceeding to conduct the winding up of the Companies and the Partnership on the basis that, to the extent the same permits and subject to the plaintiffs' entitlement to an indemnity secured by an equitable lien as specified in order 1, the plaintiffs should distribute the proceeds of realisation of the assets of the Partnership in the manner following:
(a) First: in satisfaction of the direction in order 1.
(b) Secondly: to the extent that such assets of the Partnership are the subject of an established "security interest" within the meaning given to that term in s. 51A of the Corporations Act 2001 (Cth), to a secured creditor over those assets in accordance with the terms of the security.
(c) Third: proportionately, in paying the debts and liabilities of the Partnership and the expenses of and incidental to the dissolution of the Partnership.
(d) Fourth: proportionately, to the extent of any surplus, as set out in clause 19.3(b) of the Partnership Deed.
(e) Fifth: proportionately, to the extent of any surplus, as set out in clause 19.3(c) of the Partnership Deed.
These orders are similar but not identical to the orders that were sought before Vaughan J that are the subject of his decision in Re GGA Lifestyle Pty Ltd (admins apptd); Ex parte Woodhouse.
The plaintiffs have not given notice of the application to all of the known creditors of the Companies. The plaintiffs have served the application on Westpac, the directors of each of the Companies, the Fair Entitlements Guarantee Branch of the Commonwealth Department of the Attorney‑General (FEG) and the Australian Securities and Investments Commission.[7] The plaintiffs seek orders that they give notice of the orders made by the court to the known creditors of the Companies and that the costs of the application be paid out of the assets of the Partnership as costs of the realisation of those assets.
[7] Affidavit of Daniel Hillston Woodhouse filed 14 August 2020 [35].
On 21 September 2020, orders were made to join the sole directors of the Companies as defendants to the application and for leave for Westpac to be heard on the application. Ultimately, Westpac did not file submissions nor seek to be heard on the application. The defendants filed two sets of written submissions in relation to the application, but did not appear at the hearing of the application, nor do they seek to be heard further on the application.
Legal principles on an application for directions
Section 90-20 of the Insolvency Practice Schedule enables the classes of persons specified in that section to apply to the court for an order under s 90‑15 of the Insolvency Practice Schedule. These classes include the officers of the company (s 90‑20(1)(d)). As liquidators of the company, the plaintiffs are officers of the company and have standing to bring the application.
Under section 90-15(1), the court may make such orders as it thinks fit in relation to the external administration of a company. Examples of the types of orders that may be made under s 90‑15(1) are set out in s 90‑15(3). These include an order determining any question arising in the external administration (s 90‑15(3)(a)) and for an order in relation to remuneration, including an order for repayment of remuneration paid to an external administrator (s 90‑15(3)(f)).
The power to make orders under s 90‑15 of the Insolvency Practice Schedule encompasses, at the least, the court's former power to give directions to liquidators under s 479(3) of the Act.[8] The court's exercise of its discretion will often be informed by the principles that applied on such an application to the court for directions.[9]
[8] Re Lewis (in the matter of Concrete Supply Pty Ltd) [2020] FCA 841; (2020) ACSR 459 [30].
[9] Re Broens Pty Ltd (in liq) [2018] NSWSC 1747 [39].
The approach of the court on an application for directions by an external administrator is well‑established. As Goldberg J stated in Re Ansett Australia Ltd (No 3):[10]
There must be something more than the making of a business or commercial decision before a court will give directions in relation to, or approving of, that decision. It may be a legal issue of substance or procedure, it may be an issue of power, propriety or reasonableness, but some issue of this nature is required to be raised.
[10] Re Ansett Australia Ltd (No 3) [2002] FCA 90; (2002) 115 FCR 409 [65].
Subject to the liquidator making full and fair disclosure of the material facts, the effect of a direction is to protect the liquidator from claims that they have acted unreasonably, inappropriately, or in breach of their duties; it does not determine rights and liabilities that arise out of the proposed transaction. Put another way, the order of the court sanctions a proposed course of conduct by the liquidator.
As was noted by Vaughan J in Re GGA Lifestyle Pty Ltd (admins apptd); Ex parte Woodhouse:[11]
A direction that an external administrator may properly and justifiably carry out a proposed course of conduct is used to signify that it is appropriate that he or she do so. It is a conventional form of direction in common use. It is implicit in such an order that the court is approving the proposed conduct. Often a proposed direction in this form will raise an issue of propriety or reasonableness. Directions are available and appropriate on that basis. (citations omitted)
[11] Re GGA Lifestyle Pty Ltd (admins apptd); Ex parte Woodhouse [23].
Various courts have considered that it is appropriate to make directions under s 90‑15 or its precedessors in relation to the priorities that should apply to the distribution of the proceeds of the liquidation.[12]
[12] See, for example, Woods & White v Hopkins [2016] WASC 16 [34] - [37]; Re O'Keeffe Heneghan Pty Ltd (in liq) [2018] NSWSC 1885; Re Victoria Station Corporations Pty Ltd (admins apptd) [2018] VSC 163; (2018) 56 VR 26.
Directions for indemnity and supporting lien
In their interlocutory application, the plaintiffs seek orders effectively extending the order of Vaughan J, that they would be justified in conducting the administration on the basis they are entitled to an indemnity secured by an equitable lien against the assets of the Partnership, to their conduct of the liquidation of the Companies.
Counsel for the plaintiffs drew my attention to the fact that these orders were sought at the original hearing. Vaughan J declined to make these orders on the basis that the question was, at that time, hypothetical and might never arise. This is no longer the case, as each Company is now in liquidation.
For the following reasons, I am satisfied that it is appropriate to make directions in terms of par 1 of the plaintiffs' minute of proposed orders.
First, I accept that the issue raised by this order requires the exercise of a legal judgment. In these circumstances, it is appropriate that the plaintiffs receive the protection of the proposed directions as to the course of conduct.
Second, this order is an extension of the order that was previously made by Vaughan J when the company was in liquidation. His Honour set out comprehensively in his judgment the reasons he considered it was appropriate to make orders at that time.[13] I respectfully adopt his Honour's reasoning in relation to this order. The only matter that has changed is that the Companies are now in liquidation. As a result, this application is now identical to that considered by Acting Master Gething in Woods & White v Hopkins.
[13] Re GGA Lifestyle Pty Ltd (admins apptd); Ex parte Woodhouse [33] - [56].
The steps reasonably taken by the plaintiffs as liquidators and the costs and expenses reasonably incurred by them in the care, preservation and realisation of the Partnership property will benefit the creditors of the Partnership and the Companies as partners. Consistent with the principle in Re Universal Distributing Co Ltd (in Liq),[14] the plaintiffs' reasonable costs and expenses (including their reasonable remuneration) should be paid from the assets of the Partnership in priority to the claims of Partnership creditors and the Companies, as partners. On this basis, consistent with the decisions in each of these cases, I consider it is appropriate to make the order sought by the plaintiffs in order 1.
[14] Re Universal Distributing Co Ltd (in Liq) [1933] HCA 2; (1933) 48 CLR 171.
Directions in relation to priorities of distribution on winding up
Initially, the plaintiffs sought orders in relation to the priority in which the proceeds of realisation of Partnership assets be applied on a winding up at the hearing of the originating application. Vaughan J declined to make the orders for two reasons. First, because at that stage, the question was hypothetical, and second, because other parties may wish to be heard on the orders.
There is a contest on previous authorities as to whether the priorities regime set out in the Act applies to partnership assets where one or all of the partners are companies. At the time of the hearing, the issue had been considered at first instance on four occasions but had not been the subject of a decision of any intermediate appellate court, or the High Court. Two of the decisions at first instance held the priorities regime under the Act did not apply[15] and two held it did.[16] None of the decisions consider all previous authorities or seek to distinguish the other authorities.
[15] Anmi Pty Ltd v Williams [1981] 2 NSWLR 138 (in relation to the predecessor to the current Act); Re Victoria Station Corporations Pty Ltd (admins apptd).
[16] Woods & White v Hopkins [34] - [37]; Re O'Keeffe Heneghan Pty Ltd (in liq).
For this reason, I accept the plaintiffs' submission that the matter has not been settled and that there are arguments in favour of both views. Counsel for the plaintiffs submitted that the better view is that the priorities regime set out in the Act applies.
Legislative regime
The issue in this case, regarding which of the priorities regimes applies, arises because the legislation that governs the Partnership provides for different priorities of payments on the winding up of the Partnership to that which governs the priorities on the liquidation of each of the Companies who are the partners of the Partnership.
Partnership Act 1895 (WA)
Section 10 of the Partnership Act provides that persons who enter into a partnership are called collectively a 'firm' and the name under which they carry on business is called 'the firm name'. Pursuant to s 16 of the Partnership Act:
Every partner in a firm is liable, jointly with the other partners, for all debts and obligations of the firm incurred while he is a partner, and after his death his estate is also severally liable in a due course of administration for such debts and obligations so far as they remain unsatisfied, but subject to the prior payment of his separate debts.
Section 30 of the Partnership Act sets out the meaning of 'partnership property' and relevantly provides that:
(1)All property and rights and interests in property originally brought into the partnership stock, or acquired, whether by purchase or otherwise, on account of the firm or for the purposes and in the course of the partnership business, are called in this Act partnership property, and must be held and applied by the partners exclusively for the purposes of the partnership, and in accordance with the partnership agreement.
The provisions that apply on the dissolution of a partnership are set out in pt IV of the Partnership Act. Relevantly, the Partnership Act provides for the property of the partnership to be applied to the payment of the debts and liabilities of the partnership, with the surplus assets applied to the payments of what is due to the partners, after deducting what may be due from the partners to the partnership (s 50).
Section 57 addresses the rules for the distribution of assets on a final settlement of accounts. Subject to any agreement to the contrary (s 57(1)), s 57(3) provides that the assets of the partnership:
shall be applied in the following manner and order:
(a) in paying the debts and liabilities of the firm to persons who are not partners therein;
(b) in paying to each partner rateably what is due from the firm to him for advances as distinguished from capital;
(c) in paying to each partner rateably what is due from the firm to him in respect of capital;
(d) the ultimate residue, if any, shall be divided among the partners in the proportion in which profits are divisible.
Corporations Act 2001 (Cth)
Chapter 5 of the Act concerns the external administration of companies.
Div 6 of pt 5.6 of the Act is titled 'Proof and ranking of claims'. Section 553 specifies the debts or claims that are provable in a winding up and provides that 'in every winding up, all debts payable by, and all claims against, the company … are admissible to proof against the company'.
Pursuant to s 553E of the Act:
Subject to this Division, in the winding up of an insolvent company the same rules are to prevail and be observed with regard to debts provable as are in force for the time being under the Bankruptcy Act 1966 in relation to the estates of bankrupt persons (except the rules in sections 82 to 94 (inclusive) and 96 of that Act), and all persons who in any such case would be entitled to prove for and receive dividends out of the property of the company may come in under the winding up and make such claims against the company as they respectively are entitled to because of this section.
Subdivision D addresses the priorities that apply on the winding up of a company. Pursuant to s 555 'except as otherwise provided by this Act', all debts and claims rank equally. If the 'property of the company' is insufficient to pay the debts in full, they are paid on a pro rata basis.
Section 556 specifies certain payments as being priority entitlements including some costs of the winding up and some employee entitlements. Section 559 of the Act provides that debts within each of the classes in s 556(1) rank equally between themselves and must be paid in full. If the 'property of the company' is insufficient to pay the debts in full, they are paid on a pro rata basis. Section 561 of the Act gives priority to certain employee entitlements over the claims of secured creditors in relation to a 'circulating security interest created by the company'.
Section 9 of the Act defines 'property' as meaning:
any legal or equitable estate or interest (whether present or future and whether vested or contingent) in real or personal property of any description and includes a thing in action and: …
(e) in Part 5.6 (winding up generally) – has a meaning affected by section 513AA.
Section 513AA defines 'property of a company' to include PPSA retention of title property, if the security interest vests in the company because of s 267 or s 267A of the Personal Property Securities Act 2009 (Cth) (namely property subject to an unperfected security interest); or s 588FL of the Act (collateral not registered within time).
Bankruptcy Act 1966 (Cth)
Section 45 of the Bankruptcy Act 1966 (Cth) (Bankruptcy Act) allows a creditor of a partnership to present a petition for bankruptcy against the partnership if they are entitled to present a petition against any member of the partnership (s 45(1)). It also enables a creditor to present a petition against any member of the partnership, and not all members (s 45(2)). Section 56A to s 56G address the presentation of petitions against partnerships.
Where two or more members of a partnership have become bankrupt, the court can consolidate the proceedings. In those circumstances, s 110(1) of the Bankruptcy Act applies. Section 110(1) provides that:
In the case of joint debtors, whether partners or not, the joint estate shall be applied in the first instance in payment of their joint debts, and the separate estate of each joint debtor shall be applied in the first instance in payment of his or her separate debts.
Section 141 of the Bankruptcy Act addresses the payment of joint and separate dividends to creditors and provides:
Where one partner of a firm becomes bankrupt, a creditor to whom the bankrupt is indebted jointly with the other partners of the firm or any of them shall not receive a dividend out of the separate property of the bankrupt until all the separate creditors have received the full amount of their respective debts.
Submissions
Plaintiffs' submissions
The plaintiffs submit that even though the hearing was heard as an ex parte application, it was appropriate for the court to make the directions sought. The plaintiffs have served all parties who have a material interest in the issues for determination and those parties have elected not to appear at the hearing. The plaintiffs say that this is consistent with the approach adopted in the cases that have previously considered the issue of which priorities regime should apply. Counsel for the plaintiff drew my attention to the decision of Robson J in Re Victoria Station Corporations Pty Ltd (admins apptd) where his Honour made directions but declined to make declarations in the absence of the interested parties.[17]
[17] Re Victoria Station Corporations Pty Ltd (admins apptd) [120].
The plaintiffs say that the question as to whether the priorities regime prescribed in s 561 of the Act applies to partnership assets where one or more of the partners is a corporation is not settled. They emphasised that each of the previous decisions predate the recent High Court decisions of Carter Holt Woodproducts Australia Pty Ltd v The Commonwealth[18] and Commissioner of State Revenue v Rojoda Pty Ltd[19] which, in the plaintiffs' submission, address analogous matters.
[18] Carter Holt Woodproducts Australia Pty Ltd v The Commonwealth [2019] HCA 20; (2019) 268 CLR 524.
[19] Commissioner of State Revenue v Rojoda Pty Ltd [2020] HCA 7; (2020) 268 CLR 281.
Counsel for the plaintiffs contended that the nature of a partner's interest in partnership assets is strongly analogous to that of a trustee in trust property in that the partners have a right of indemnity to satisfy debts of the partnership and have a proprietary right in these assets to have these assets applied against these debts. On this basis, the plaintiffs submitted the assets of the Partnership was property available to the creditors of each Company.
Other parties' submissions
The defendants filed two sets of written submissions in relation to the application.[20] Initially, the defendants sought a direction in relation to the validity of the Westpac security, given the issues identified by the plaintiffs as part of the application. Ultimately, the defendants did not pursue this application. The defendants contend that s 556 of the Act does not apply to the winding up and that the court should make orders to this effect.
[20] Defendants' submissions filed 15 September 2020 and 6 October 2020.
FEG did not file submissions on the application nor seek to be heard in relation to the application. Prior to the hearing, they wrote to the solicitors for the plaintiffs in respect of the application, which correspondence was in evidence before me.[21] FEG's position is that the employees of corporations who carry on business as a partnership should be afforded the protections and priorities in the Act. On this basis, they submitted that the decision in Anmi Pty Ltd v Williams should be preferred to the decisions of Woods & White v Hopkins and Re O'Keeffe Heneghan Pty Ltd (in liq).
[21] Affidavit of Christopher Kingsley Pearce filed 30 September 2020 'CKP1'.
I turn then to consider each of the cases on which the plaintiffs rely and the other parties referred me to in the order in which they were determined.
Relevant cases
Anmi Pty Ltd v Williams
In this case, Powell J considered the application of what was then s 291 and s 292 of the Companies Act 1961 (NSW).
The facts of this case can be summarised as follows. Three companies conducted, as their sole activity, a business in partnership. Initially, in August 1977, each of the companies resolved that each be placed under official management. A view was taken by the official manager that the effect of these resolutions was not that each of the companies was under official management but that the partnership business was under official management. Subsequently, in March 1979, liquidators were appointed to each of the companies.
Powell J held that s 291(2) of the Companies Act 1961 required the court to apply the principles and exceptions of bankruptcy (and not the provisions of the Bankruptcy Act) to the liquidation.[22] One of these exceptions was where the joint and separate estates are 'so blended together as to render it impracticable to keep them separate, they may be consolidated'.[23] His Honour found that this was not a case for consolidation of the estates and that he was required to address the questions that were raised 'in terms of the general principle reflected in s 110 and s 141 of the Bankruptcy Act 1966 (Cth).'[24]
[22] Anmi Pty Ltd v Williams 163.
[23] Anmi Pty Ltd v Williams 164 referring with approval to Archbold on Bankruptcy, 11th ed, 598.
[24] Anmi Pty Ltd v Williams 164.
Powell J considered each of the claims in issue and found that the claims of the Deputy Commissioner of Taxation and the employees were joint liabilities as they were liabilities of the partnership. In relation to the claim of the official manager, his Honour held that an issue estoppel arose from previous proceedings and that, as a result, the amount claimed by the official manager was a joint debt.
Powell J then stated:[25]
Although a partner has no title to specific property owned by the partnership, he has a beneficial interest in the partnership assets, indeed in each and every asset of the partnership. This being so, particularly, where, as is the case here, one person is the liquidator of each of the partner companies, his charge, so it seems to me, extends over the whole of the partnership property – although, technically, it may be that, if, in addition, there be some separate property, some measure of adjustment or apportionment as between the interest in the joint property and the separate property may need to be made.
…
Having, then, established that each of the principal claimants is entitled, by virtue of the application of partnership principles, to claim the right to access to joint assets in order to satisfy his or their debt or debts, it remains to determine in what order those claims are to be satisfied. As I have pointed out above, the introductory words of s 291(2) of the Companies Act 1961 are "Subject to section 292…". This being so, it seems to me that, unless the provisions of some other relevant statute so operate as to alter that order, the order to be followed is that provided for in section 292 at the Companies Act 1961. (citations omitted)
Woods & White v Hopkins
[25] Anmi Pty Ltd v Williams 166.
In this case, three companies, each as trustees of trusts, were partners of an accounting practice. Each of the companies was associated with one of the three principals of the accounting practice. In May 2014, each of these companies was placed into voluntary liquidation for the purpose of effecting a dissolution of the partnership. Subsequently, the liquidators applied to the court for orders that each of the companies be wound up in insolvency, which took effect on 15 September 2014. However, orders were not sought to appoint a receiver over partnership assets or to wind up the partnership.
A dispute arose between the former members of the accounting partnership as to the priority in which the debts should be paid. It was contended by the solicitors for one of the former partners that the unsecured claims of the Australian Taxation Office against the partnership and the former member should be paid out in priority to the remuneration, fees and expenses of the liquidators.
Acting Master Gething was referred to both the decision in Amni Pty Ltd v Williams as well as an English decision of In re Rudd & Son Ltd.[26]
[26] In re Rudd & Son Ltd [1984] 1 Ch 237.
In In re Rudd & Son Ltd, two companies were partners in a partnership business in the proportion 30% and 70%. Each company was placed into a creditors' voluntary liquidation with the same liquidator being appointed to each company. A joint committee of creditors resolved to authorise the liquidator to collect the assets and discharge the liabilities of the partnership and wind it up. Nourse J held that the relevant priorities regime in the Companies Act 1948 (UK) did not apply to the winding up of the partnership. His Honour held that the creditors of the partnership took priority over the creditors of each of the companies and ranked pari passu as between themselves. In relation to the priorities regime in the Companies Act 1948, Nourse J held that this did not apply because the section provided:[27]
that certain debts shall be paid in priority to all others, i.e. shall be preferred, "in a winding up," that is to say in a winding up of the company. It is not expressed to apply to a winding up of a partnership in which a company is a partner. The only act which provides for a preference in the case of insolvent partners is the [Bankruptcy Act] but that provision only applies to individuals and not to corporations.
[27] In re Rudd & Son Ltd [242].
Acting Master Gething held that the priorities regime under the Act did not apply to the dissolution of the partnership and that the regime under the Partnership Act applied. He held that the decision in Anmi should not be followed for two reasons. First, as a matter of statutory construction, the terms of s 556(1) of the Act did not apply to the winding up or dissolution of a partnership. Second, as a matter of principle, in his view, the decision in Anmi on this point was plainly wrong. Gething AM noted that the decision in Anmi was predicated on all of the partners of the partnership being companies, which may not always be the case, and emphasised that only one priority regime could apply to joint debts of the partnership. For this reason, he held that:[28]
[28] Woods & White v Hopkins [85] - [86].
The only logical outcome is to apply the priority regime in the [Partnership Act]. If there is a surplus payable to the individual partners after payment of all joint debts, and the application of other relevant provisions in the dissolution of the partnership, then in the distribution of the surplus:
(a)in the winding up of the corporate partner, … s556 [of the Corporations Act] would apply; and
(b)in the bankruptcy of the individual partner, … pt VI div 2 [of the Bankruptcy Act] would apply.
This conclusion is consistent with the principle in equity that joint assets should be applied first to joint debts and separate assets first to separate debts. As Nourse J explains in Rudd:[29]
That rule, having been developed as a rule of equity, necessarily requires that partnership creditors to rank pari [passu] as between themselves. A preference for one or more classes of the partnership debts over others cannot be founded on a rule of equity. Indeed it produces an inequity.
Re Victoria Station Corporation Pty Ltd (admins apptd)
[29] In re Rudd & Son Ltd [243].
In this case, two companies as trustees for a family trust entered into a partnership to establish the Victoria Station Corporation Partnership. The partnership agreement appointed another company as 'manager' of the partnership and a separate company to enter into property leases on behalf of the manager. Administrators were appointed to each of these companies. Although the companies who were partners were in administration, the partnership agreement had not been terminated at the date of the hearing.
Robson J held that the manager held the business assets on trust for the partnership and conducted the business as agent (and not trustee) for the partnership.[30] On this basis, his Honour held that this company was entitled to be indemnified by the partnership for liabilities that it incurred and had a possessory lien over the property of the partnership which was in its possession and control. As a result of these findings, his Honour commented that:[31]
Because this proceeding can be resolved by the application of agency principles, the issue of whether the Partnership Act or the Corporations priority regime applies in relation to an insolvent partnership does not arise for determination.
[30] Re Victoria Station Corporation Pty Ltd (admins apptd) [103].
[31] Re Victoria Station Corporation Pty Ltd (admins apptd) [107].
The conclusions of Robson J as to the position that applies where a company is a manager of the partnership have been accepted and endorsed by O'Bryan J in Michell, In the matter of Petromech Pty Ltd (in liq).[32]
Re O'Keeffe Heneghan Pty Ltd (in liq)
[32] Michell, In the matter of Petromech Pty Ltd (in liq) [2021] FCA 1378 [28] - [29].
The most recent consideration of the question of the priorities regime that applies in these circumstances is the decision of Black J in Re O'Keeffe Heneghan Pty Ltd (in liq). In this case, the receivers and managers of three companies who traded as a partnership applied to the court for directions. Each of the companies was the trustee of a trust and in liquidation. The evidence before the court was that the sole purpose of these three companies was to form and operate the partnership.[33]
[33] ReO'Keeffe Heneghan Pty Ltd (in liq) [16].
Black J concluded that the reasoning in In re Rudd & Son Ltd and Woods & White v Hopkins was correct and s 561 of the Act did not apply to the winding up of the partnership. In his view, s 561 (and s 556) applied only in the winding up of a company and not to the winding up of a partnership, even if the partnership has one or several companies as partners.[34] His Honour expressed the view that this construction was supported by s 556(1)(e), (g) and (h), which required the amount of debts to be determined for a particular company rather than collectively for companies in a partnership.
[34] ReO'Keeffe Heneghan Pty Ltd (in liq) [50].
Black J went on to consider whether the priorities regime prescribed by the Act should apply to the winding up of the partnership on the basis that equity follows the law. In doing so, he considered the obiter comments of Allsop CJ and Farrell J in Jones (Liquidator) v Matrix Partners Pty Ltd, in the matter of Killarnee Civil and Concrete Contractors Pty Ltd (in liq) to the effect that, even if they had not been bound by the decision of Re Amerind Pty Ltd (recs and mgrs apptd) (in liq),[35] they would have considered that equity followed the Act in applying its principles of distribution in the context of the winding up of company that carried on business as the trustee of a trading trust.[36] Black J rejected the proposition that this reasoning should be applied in Re O'Keeffe Heneghan Pty Ltd (in liq) for several reasons, including that s 561 of the Act does not reflect a statutory policy which is consistently and generally applied which equity should then follow. Black J concluded:[37]
[T]here is no corresponding provision in the Bankruptcy Act, and similar principles would therefore not be applied in the bankruptcy of a partner who was a natural person. If a partnership was comprised wholly of companies, then s 561 would apply in the winding up of each of those companies; if a partnership was comprised wholly of natural persons, no similar regime would apply in the bankruptcies of those persons; and, if a partnership comprised both companies and natural persons (as was, for example, at one point the case in the partnership in issue in Woods), then s 561 would apply in the winding up of the corporate partners and no corresponding provision would apply in the bankruptcy of the natural persons who are partners.
Accepting that equity may follow an approach adopted by statute in a proper case, I am not persuaded that equity could or should "follow the law", being s 561 of the Corporations Act, in circumstances that, as will often be the case when a submission that equity should follow a statutory approach is put, there is no consistent statutory approach to be followed.
Carter Holt Harvey Woodproducts Australia Pty Ltd v The Commonwealth
[35] Re Amerind Pty Ltd (recs and mgrs apptd) (in liq) [2017] VSC 127.
[36] Jones (Liquidator) v Matrix Partners Pty Ltd, in the matter of Killarnee Civil and Concrete Contractors Pty Ltd (in liq) [2018] FCAFC 40; (2018) 260 FCR 310 [111] - [116] (Allsop CJ); [214] - [223] (Farrell J).
[37] ReO'Keeffe Heneghan Pty Ltd (in liq) [61] - [62].
Subsequent to the decision in ReO'Keeffe Heneghan Pty Ltd (in liq), on appeal from the Victorian Court of Appeal's decision in Re Amerind Pty Ltd (recs and mgrs apptd) (in liq), the High Court considered the principles of distribution that apply on the winding up of a company that solely carried on business as the trustee of a trading trust. The issue before the court was whether s 433 of the Act applied to the surplus from the receivers' sale of assets. The court held (albeit for different reasons) that the priority regime of the Act applied to this surplus.
Several points arise from the joint judgment of Kiefel CJ, Keane and Edelman JJ. First, the dispute as to the priority regime that applied in this case is governed by fundamental principles of trust law. These include the principle that a trust is not a separate legal entity, does not have a separate solvency status from the trustee, and that a trustee is personally liable for debts incurred as trustee.[38] Second, on insolvency, property which is held on trust by an insolvent company is excluded from the assets available for distribution among the company's creditors. This is because the liquidator's power extends only to those rights of the insolvent company that 'enure in law 'for the benefit of' the 'personal estate'' of the insolvent company.[39] Third, the right of a liquidator of a trustee to indemnity from trust assets is not an unconditional right. The liquidator takes the power of exoneration with all of its characteristics, including its limitations.[40] Their Honours concluded that:[41]
The fundamental reason why this appeal must be dismissed flows from an appreciation that s 433 of the Corporations Act is not based upon a conception of a trustee company's rights that draws a sharp division between, on the one hand, the rights held on trust and, on the other hand, the trustee's powers in association with those rights, here the power of exoneration. The rights of the trustee, collectively so viewed, can be used for the benefit of the trustee in discharging debts to trust creditors and, to that extent, when the subject of a circulating security interest they are property of the company coming into the hands of a receiver. From that property the receiver must pay various debts, including employee debts, in priority to any claim for principal or interest in respect of debentures secured by that circulating security interest.
[38] Carter Holt Harvey Woodproducts Australia Pty Ltd v The Commonwealth [23] - [24].
[39] Carter Holt Harvey Woodproducts Australia Pty Ltd v The Commonwealth [26] - [27].
[40] Carter Holt Harvey Woodproducts Australia Pty Ltd v The Commonwealth [40].
[41] Carter Holt Harvey Woodproducts Australia Pty Ltd v The Commonwealth [57].
Their Honours expressed the view that this conclusion was consistent with the underlying purpose of provisions such as s 433 and s 561 of the Act. In their view:[42]
It would be perverse if the Corporations Act operated to deny employee creditors a particular priority over the holders of a circulating security interest solely for the reason that the company which employed them was, perhaps even unknown to the employees, trading as a trustee.
[42] Carter Holt Harvey Woodproducts Australia Pty Ltd v The Commonwealth [58].
Bell, Gageler and Nettle JJ in their joint judgment agreed the appeal should be dismissed, but for different reasons. Relevantly, their Honours agreed that the proceeds from the exercise of a corporate trustee's right of exoneration in relation to trust liabilities can only be applied to satisfy liability of the trust to which that right relates.[43] Their Honours recognised that:[44]
Complications may arise in cases where a corporate trustee has carried on business as trustee of more than one trust or as trustee of a trust and on its own account. But the solution proposed by King CJ — of construing s 556 in such circumstances as if the liquidator of the corporate trustee held separate funds, each for a different group of creditors — coheres to the law of trusts and has common sense to commend it. It may not provide the whole of the answer where, for example, expenses, such as the wages and salaries of employees, have been incurred by a company partially on one account and partially on another. But as experience shows, situations of that kind are not insuperable. As Allsop CJ concluded in Jones v Matrix, they fall to be resolved by the application of principle to the text of the legislation in the particular circumstances of each case.
[43] Carter Holt Harvey Woodproducts Australia Pty Ltd v The Commonwealth [92].
[44] Carter Holt Harvey Woodproducts Australia Pty Ltd v The Commonwealth [97].
Gordon J agreed with Bell, Gageler and Nettle JJ but wrote a separate judgment. Her Honour stated that the trustee's right of exoneration gave the trustee a proprietary interest in the trust assets which falls within the broad definition of 'property' in s 9 of the Act.[45] Her Honour stated that historically, employees have been given priority in the event of a corporate insolvency in relation to circulating assets and expressed the view that:[46]
This Court should be slow to attribute an intention to Parliament to create two classes of employees in insolvency: those employed by a company and those employed by a corporate trustee. The appellant put forward no principled basis for such a differentiation.
Commissioner of State Revenue v Rojoda Pty Ltd
[45] Carter Holt Harvey Woodproducts Australia Pty Ltd v The Commonwealth [141].
[46] Carter Holt Harvey Woodproducts Australia Pty Ltd v The Commonwealth [144].
In this case, the High Court considered the nature of the interest of partners in partnership property. The appeal concerned declarations of trust contained in two deeds in relation to the property in two partnerships that had not yet been wound up. The deeds provided that freehold titles that formed part of the partnership property be held on trust for the former partners or their representatives in fixed shares according to their share in the partnership. The Commissioner of State Revenue imposed duty on the declarations of trust in the deeds on the basis that new interests were created by these deeds.
The plurality (Bell, Keane, Nettle and Edelman JJ) agreed that, subject to the express terms of a partnership agreement, a partner's legal title to partnership property is held on trust for all the partners.
The interest of partners in partnership assets is not an interest in a particular asset but is an 'indefinite and fluctuating interest in relation to the assets, being the right to a proportion of the surplus after the realisation of the assets and payment of the debts and liabilities of the partnership'.[47] This remains the position after the dissolution of the partnership but before completion of the winding up.[48]
[47] Commissioner of State Revenue v Rojoda Pty Ltd [21].
[48] Hendry v The Perpetual Executors and Trustees Association of Australia Ltd (1961) 106 CLR 256, 265 - 266.
Their Honours held that:[49]
A basal fiduciary obligation, as moulded by agreement, is that each partner will hold, and will deal with, legal rights to partnership property for the benefit of all the partners, whose interest lies in their right to a share of the net proceeds of partnership property after winding up.
[49] Commissioner of State Revenue v Rojoda Pty Ltd [30].
The plurality considered the interest each partner held in the partnership on dissolution and on winding up. They stated that:[50]
Upon dissolution, but before the partnership is wound up, the partnership property will continue to be held by the legal owner on trust with a duty to sell. Once winding up is complete, and the interest of each partner in the share of the surplus can be identified, then, like the rights of legatees of a wholly administered estate, s 50 of the Partnership Act recognises the partners' right to the transfer of the net value of their entitlements from the person holding the surplus. (citations omitted)
[50] Commissioner of State Revenue v Rojoda Pty Ltd [40].
The plurality described the interests of each partner in the assets of the partnership as a non‑specific interest in relation to all of the partnership assets with a right, on dissolution, to compel the sale of the assets in order to realise a fund from which, at the conclusion of the winding up of the partnership, a share could be claimed.[51]
[51] Commissioner of State Revenue v Rojoda Pty Ltd [41].
In a separate judgment, Gageler J described the right of each partner against the other partners in the following terms:[52]
Unless varied by the partnership agreement or otherwise by the consent of all partners, each partner has a right against all other partners to have all of the partnership property held and applied exclusively for the purposes of the partnership in accordance with the partnership agreement and, on dissolution of the partnership, to have the debts and liabilities of the partnership paid out of the partnership property and then to have the surplus applied in payment of what is due to the partners respectively under the partnership agreement. That right which a partner has against the other partners is itself property of the partner: it is an equitable chose in action. (citations omitted)
Disposition
[52] Commissioner of State Revenue v Rojoda Pty Ltd [73].
The starting point is to consider the nature of a partnership and the interest that each partner has in partnership property.
A partnership is not a legal entity but is a relationship which exists between people who carry on a business in common with a view to profit.[53] Partners are jointly liable for all debts and obligations of the firm. This obligation continues after the death of a partner for debts incurred while a partner, subject to prior payment of the partner's separate debts.[54]
[53] Partnership Act 1895 (WA) s 7(1).
[54] Partnership Act 1895 (WA) s 16.
The mutual rights and obligations of partners can be varied by consent of all partners.[55] Under the Partnership Act, which terms have not been varied by the Deed:
(a)each Company was jointly and severally liable for all debts and liabilities incurred in carrying on the Partnership business (s 16);
(b)each Company had a right to have all Partnership property held and used exclusively for the purposes of the Partnership (s 30(1)); and
(c)on dissolution of the Partnership, each Company is entitled to have the debts and liabilities of the Partnership paid out of Partnership property and for the surplus to be paid to each Company under the Deed (s 50).
[55] Partnership Act 1895 (WA) s 29.
In this case, s 57 of the Partnership Act does not apply as the Deed expressly provides for the application of Partnership property on the dissolution of the Partnership. Clause 19.3 of the Deed provides that the proceeds from the sale of all Partnership Property is to be applied as follows:
(a) first the debts and liabilities of the Partnership and the expenses of and incidental to the dissolution of the Partnership;
(b) second to each Partner any unpaid profits or interest on capital which may be due to the Partner; and
(c) third the balance to the partners divided in the shares to which they are each entitled to the capital of the Partnership.
Prior to the dissolution of the Partnership, each of the Companies had a non-specific interest in all of the assets of Partnership. On dissolution, each Company (or in this case, the plaintiffs as liquidators) had the right to compel the sale of the assets of the Partnership to create a fund from which, at the conclusion of the winding up of the Partnership, a share could be claimed. This is what would occur if the Partnership was solvent. In my view, this legal interest does not change if a partnership is insolvent. In this regard, contrary to the submissions of the plaintiffs, I do not consider that the High Court's decision in Rojoda materially assists the plaintiff or resolves the issue that arises in this case.
Similarly, the decision in Re Victoria Station Corporations Pty Ltd is also of little assistance to the plaintiffs. That decision (and the subsequent decision in Michell, In the matter of Petromech Pty Ltd (in liq)) can be distinguished on the particular factual circumstances that arose for consideration – namely that the company in liquidation was the agent of the partnership. This is consistent with Robson J's specific comment that in that case it was not necessary to resolve the question of which priorities regime applied.
In my view, for the following reasons, I consider the conclusion reached by Acting Master Gething in Woods & White v Hopkins and by Black J in Re O'Keeffe Heneghan Pty Ltd (in Liq), that the priorities regime in s 556 of the Act does not apply to the winding up of the Partnership, is correct. That is, in my view, the joint assets of the Partnership should be applied first to the payment of the debts of the Partnership. In applying the joint assets, the order of priority in s 556 of the Act does not apply; the order of priority in the Deed applies. Where there are insufficient joint assets to meet the joint debts, the debts should be paid pari passu. Proof of debts can be lodged for any unpaid partnership debts in the liquidation of each partner Company.
First, in reaching this conclusion, it is important to emphasise that in this case the Partnership has been dissolved. The Partnership is governed by the terms of the Deed and the Partnership Act. The Deed specifically sets out a regime for the payment of debts and liabilities of the Partnership on its dissolution. There is nothing in the text, context or purpose of the Deed or the Partnership Act which would support a view that a different regime should apply. In my view, cl 19 of the Deed applies to the dissolution of the Partnership.
Second, the text of s 556 of the Act provides that the priority regime set out in that section applies on 'the winding up of a company'. On its face, s 556 does not apply to the winding up of a partnership. This conclusion is supported by other sections of the Act which enable the provisions of ch 5 of the Act to apply to a partnership. The definition of a 'Part 5.7 body' in s 9 of the Act applies to a partnership with more than five members (par (c) of the definition). Where a partnership is a pt 5.7 body, by reason of s 583 of the Act, the partnership can be wound up under ch 5 of the Act 'with such adaptations as are necessary' to accommodate the fact that the partnership is not a corporation. In that situation, the Act (including the priority regime under s 561 of the Act) would apply to the winding up of the partnership. However, in this case, the Partnership only has two members and does not fall within the extended definition in the Act of a pt 5.7 body. There is nothing in the text, context or purpose of the Act which would support a construction that extends the operation of ch 5 of the Act (including the priorities regime in s 556) to the Partnership.
Third, this construction is consistent with the different position of a creditor of a company in liquidation as opposed to a creditor of a partnership which is being wound up. In respect of a creditor of a company being wound up under the Act, its rights to enforce a debt against the company is replaced by a right to prove in the winding up. The Act then prescribes a formal process for the giving of notices, lodgement of proofs of debt, adjudication of the proofs by the liquidator, as well as formal processes for appeal by creditors from any decision of the liquidator. Ultimately, on the winding up and deregistration of the company, the rights of creditors are formally extinguished. Different principles and consequences apply on the dissolution or winding up of a partnership. Notwithstanding the winding up or dissolution of a partnership, all partners remain jointly liable for the debts of the partnership. Apart from practical limitations which arise from the solvency of any of the partners, there is no legal impediment to creditors pursuing the partners to recover their debts.[56]
[56] HN QCV Bottle Tree Village Pty Ltd v QCV Bottle Tree Village Pty Ltd [2018] NSWSC 1807 [87] - [88].
Fourth, the decision of the High Court in Carter Holt Woodproducts Australia Pty Ltd v The Commonwealth in relation to trading trusts is, in my view, of only limited assistance in the resolution of the issue in this case. In the case of trading trusts, the debts incurred by the corporate trustee are, as a matter of law, incurred by the company who has a right of indemnity against the assets of the trading trust in preference to the beneficiaries of the trading trust. This reflects the position that the trust is not a separate legal entity. While there are some similarities to a partnership (which is also not a separate legal entity), there are some important distinctions including the following. In the case of a partnership, debts are incurred by partners and the partners are jointly liable for the debts. It is possible for the partnership and its partners to have separate and different solvency status. It is also possible for acts to be done in the name of the partnership.[57] Creditors of the partnership are entitled to payment from the assets of the partnership. If the partnership assets are insufficient to meet the debts, the partners are jointly liable for payment of these amounts. If a partner pays more than their share of the joint debt, they are entitled to claim contribution from the other partners.[58] In my view, these distinctions are important and cannot be ignored.
[57] Partnership Act 1895 (WA) s 13.
[58] Staples v Milner as Trustee of Property of Stapes, Baker, Firth & Campbell (1998) 83 FCR 203, 212.
Finally, the plaintiffs submit that 'equity should follow the law' and that, as a result, the priorities regime in the Act should apply on the winding up of the Companies. As was noted by Black J in Re O'Keeffe Heneghan Pty Ltd (in Liq) at [52] ‑ [62], the 'law', in relation to partnerships, does not apply the priorities regime in the Act but applies the priorities regime set out in the Partnership Act. I am not persuaded that there is a consistent statutory approach in the Bankruptcy Act, the Partnership Act and the Act as to whether certain groups of creditors (including employees) should receive priority over other creditors. For this reason, I am not persuaded that equity should follow s 561 of the Act in this case.
As was noted by Black J in Re O'Keeffe Heneghan Pty Ltd (in Liq) at [51], it is open to the legislature to resolve this issue by amending the provisions of the Act to extend their application to a partnership of less than five members or to a partnership where all partners are corporations or by introducing legislation to specifically address insolvent partnerships.[59] This has not occurred to date, notwithstanding the consistent statutory construction of these provisions of the Act since 2016.
[59] See, for example, Insolvent Partnerships Order 1994 (UK).
Conclusion
The complexity that arises in this case and the other cases that have previously addressed this issue, primarily arises because the liquidator has tried to subject the activities of companies trading as a partnership to insolvency laws which are principally, if not almost entirely, directed to the companies that trade or hold assets in their own right. This complexity can only be resolved if and when the legislature considers that a different result should apply to that which arises on what I consider to be the proper construction of the legislation.
For the reasons that I have set out above, I consider that the priorities regime under the Act does not apply to the winding up of the Partnership. The winding up of the Partnership is governed by the Deed. For this reason, I consider that orders should be made in terms of the second alternative of Order 2 in the minute of proposed orders.
In relation to the remaining orders, orders should be made to extend the orders previously made by Vaughan J to the plaintiffs' conduct as liquidators, secured by an equitable lien against the assets of the Partnership. Orders should also be made for creditors to be given notice of the orders, with liberty to apply to vacate the orders, and for costs in the terms sought by the plaintiffs.
I certify that the preceding paragraph(s) comprise the reasons for decision of the Supreme Court of Western Australia.
FD
Associate to the Honourable Justice Hill
19 SEPTEMBER 2022
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